Canadian banks weigh on Toronto exchange

SAN FRANCISCO (MarketWatch) — Shares of Canadian banks weighed on the broader Toronto market, with Bank of Nova Scotia exerting the most pressure following its announcement that it is buying ING Bank of Canada.

Keefe, Bruyette & Woods analyst Brian Klock said in a note it was an expensive deal for Bank of Nova Scotia, but that it needs the deposits.

“While ING Direct most likely represents the last bank for sale in Canada, we believe that low profitability of this broker-like mortgage business may not have deserved as high a purchase price as BNS paid,” said Klock.

Klock said that while the bank will only generate about a 50-basis point return on assets on the deal it will be able to “use a significant amount of leverage given that most of these assets are insured Canadian mortgages.”

The bank was also downgraded to neutral from outperform by CreditSuisse on Wednesday after it reporting a weaker-than-expected outlook for international loan growth. CreditSuisse also lowered its price target on Bank of Nova Scotia to C$57 from C$61. Bank of Nova Scotia reported higher quarterly earnings on Tuesday. Read more on BNS earnings.

Shares of Royal Bank of Canada were up only 0.4% and Toronto-Dominion shares were down 1.5% despite reporting significantly higher profits and boosting dividends on Thursday. Read more on T-D, RBC.

The S&P/TSX Capped Financial Index (TTFS) declined 1.1% for the day and is barely hanging on to positive territory for the week with a 0.1% gain. Of the four Canadian banks, only Royal Bank of Canada is in positive territory for the week.

Energy and mining stocks also weighed heavily on the TSX as gold and oil prices declined.

On the New York Mercantile Exchange, crude oil for October delivery
CLV2, +0.18%
fell 1% to $94.51 a barrel and gold for December delivery
GCZ2, -0.05%
settled down 0.4% to $1,657.10 an ounce.

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